Short-Term, High-Probability Mean Reversion Indicator: Performance Speaks for Itself

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Includes: DIA, EEM, EFA, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

The market continued to trade in a sideways fashion Wednesday as the broad index, S&P 500 (NYSEARCA:SPY) finished the day flat. Historically, when the market trades in a tight range, particularly over the short-term, the more violent the move is outside of the range.

There are several large gaps that have yet to close in several of the major market indexes, so I am leaning towards a sharp downside move, but of course it truly doesn’t matter to the High-Probability, Mean-Reversion strategy. The strategy doesn’t care about how the market performs, that is, until an extreme overbought/oversold reading occurs. It is really quite simple. The performance speaks for itself.

Chart courtesy of Collective2.com.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 3/08/11

Benchmark ETFs

* S&P 500 (SPY) – 51.8 (neutral)
* Dow Jones (NYSEARCA:DIA) 56.8 (neutral)
*Russell 2000 (NYSEARCA:IWM) – 53.0 (neutral)
* NASDAQ 100 (QQQQ) – 39.7 (neutral)

Sector ETFs

* Biotech (NASDAQ:IBB) – 72.5 (overbought)
* Consumer Discretionary (NYSEARCA:XLY) – 54.4 (neutral)
* Health Care (NYSEARCA:XLV) – 66.1 (neutral)
* Financial (NYSEARCA:XLF) – 57.3 (neutral)
* Energy (NYSEARCA:XLE) – 37.3 (neutral)
* Gold Miners (NYSEARCA:GDX) – 38.8 (neutral)
* Industrial (NYSEARCA:XLI) – 53.4 (neutral)
* Materials (NYSEARCA:XLB) – 36.1 (neutral)
* Real Estate (NYSEARCA:IYR) – 53.8 (neutral)
* Retail (NYSEARCA:RTH) – 58.1 (neutral)
* Semiconductor (NYSEARCA:SMH) – 26.4 (oversold)
* United States Oil Fund (NYSEARCA:USO) – 72.6 (overbought)
* Utilities (NYSEARCA:XLU) –80.6 (very overbought)

International ETFs

* Brazil (NYSEARCA:EWZ) – 49.2 (neutral)
* China 25 (NYSEARCA:FXI) – 80.6 (very overbought)
* EAFE (NYSEARCA:EFA) – 46.5 (neutral)
* South Korea (NYSEARCA:EWY) – 61.7 (neutral)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 63.2 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 45.0 (neutral)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 51.9 (neutral)
* UltraLong QQQQ (NYSEARCA:QLD) – 38.9 (neutral)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 51.4 (neutral)
* Ultra Short S&P 500 (NYSEARCA:SDS) – 46.9 (neutral)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 48.7 (neutral)

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in XLU over the next 72 hours.